ISSUES IN MY COUNTRY WITH LAI OMOTOLA
Why Dangote May Not Announce the Price of Fuel.
Recently, Dangote Refinery commenced the lifting of premium motors spirit known as petrol. Quite a number of people across Nigeria celebrated the commencement of this lifting.
It was a joyous moment when the Minister of Finance came in to inaugurate the lifting. Later in the day, it was reported in one of the media outlets that Dangote had sold fuel to the Nigerian National Petroleum Company Limited (NNPCL) at the rate of 766 Naira per litre. NNPCL swiftly responded that they never bought fuel at 766 Naira per litre and that indeed they bought the fuel at 898 Naira per litre. Dangote quickly responded that the price NNPCL quoted was not true and that the only body that can give the true price of the fuel is the technical subcommittee set up by the Federal Government,
This has left many Nigerians confused and frustrated. Up to this moment, Dangote has not announced the price of fuel. Lots of media houses and analysts are making efforts to get the price of Dangote fuel, and up till now they have not been able to, and this has become more frustrating.
PRICING TEMPLATE
Today, I want to break down the price for you and reveal some things that will guide us. I think primarily Dangote doesn’t want to reveal the price himself. The reason is very simple. When Dangote wanted to start this refinery, he hinged this refinery on two pillars; number one, this refinery will reduce the price of fuel in Nigeria drastically and also stop fuel scarcity.
These two things were sold to the federal government as well as Nigerians. So the Federal Government sees the coming of the Dangote refinery as the coming of that of a messiah. So Dangote understands that the momentum behind him is the people of Nigeria; therefore, breaking the news that the price of fuel would skyrocket to 898 naira per litre would automatically make him lose the support of Nigerians he has been having for years. Therefore, announcing such a price will make many Nigerians see him as a terrible businessman. So, for this reason, Dangote has been very careful in announcing the price; instead, he allowed NNPCL to come up with the price and that people should see that NNPCL is actually the culprit.
Really, who is the problem in the midst of this scene? By the time I break it down, the decision to know who is at fault will be yours. So let’s go.
NNPCL later came out to bring out a price template. The pricing template says it all. The template has revealed quite a number of things. If you are a business analyst, with the pricing template that’s been shown, you can know the length and breadth of this transaction.
What can we deduce from this pricing template? Number one, the price of crude oil is or was sold in dollars, and we have the price of crude oil in tonnes, and we have the price of crude oil per litre, and NNPCL is the one that supplies the larger portion, if not all, to Dangote, and the cost of raw materials is about 85%. The partnership between NNPCL and Dangote is that NNPCL would supply crude oil to him and he would refine, so NNPCL would cover the cost of the supply and also the cost of the refining.
The cost of refining one litre of petrol to Dangote is 56 naira, and NNPCL puts the price of logistics after the regulatory fees. The cost of logistics within Lagos is 15 Naira per litre, and NNPCL puts the margin at 56 Naira per litre, and by the time you add all these together, it will give you 898 naira, and by the time you move to any petrol station within Lagos, it lands at 950 naira, after the middlemen have added their home margins.
So what is clear by this template is that the cost of refining fuel for dangote is 56 naira per litre which is certain. The question is this: if Dangote is refining at 56 naira per litre, is it high? Is it competitive? Is it average? Also, Dangote can break even by refining at 56 Naira per litre, knowing fully well that there is an investment of $20 billion at stake there.
ISSUES OF INDEPENDENT MARKETERS
The Independent Petroleum Marketers Association of Nigeria (IPMAN) has said that Dangote has not invited them to come and lift fuel and that Dangote has made the NNPCL the sole buyer, creating a monopoly.
The explanation for this is that a refinery with a capacity of 650, 000 bpd cannot go and be talking with individual marketers that can only buy small quantities. With that kind of gigantic refinery, he wants to be talking with bulk buyers, and that is the only way his business can make sense to him. He is not interested in talking with people that will come with 10 trucks or 50 trucks. He wants someone that will take 25 million litres of oil in one day, and that person has the capacity to distribute fuel among other value chain holders along the line. This is the best model that can work for such a refinery, and this is also international best practice.
The IPMAN people should forget about Dangote talking to them. It is not going to work. Dangote will talk with just one buyer that has the capacity.
Secondly, IPMAN doesn’t have the resources to buy a million litres of fuel in one day. 1 million litres a day is close to 1 billion Naira in one day, which is the minimum that Dangote will want to sell to anybody. No trader has that capacity, and if they even have such capacity, they will be looking for funding from banks, and today the interest margin on bank loans will be difficult for marketers to put together.
So the NNPCL is the only one that has the capacity to put these funds together and to also get a lower interest rate, and that is why Dangote is insisting that the NNPCL should lead the charge.
Understanding this fact is very crucial. It is not intentional that Dangote doesn’t want to talk with the independent marketers, but it is intentional that the supply must be in bulk.
If you understand, when we were doing the electricity privatization, the gencos had to sign an agreement with the federal government when the government set up the Nigeria bulk buyers electricity agency. These are the people that guarantee everything the Gencos would generate, buy-off plans, and the Gencos would concentrate on generating because they already have the guarantee buyers.
This is the way it works with this kind of infrastructure coming to play. So the oil marketers need to understand this. Again, the truth of the matter is that if the marketers are allowed to come and pick up one truck, two trucks, or three trucks, they will be doing it at a lesser price than NNPCL. If NNPCL is selling fuel at 950 Naira per litre, the marketers will be selling it probably at the rate of 920 or 930 Naira, and when this happens, it will cut distortions in the market. When drivers see that they are selling petrol in a particular petrol station at the price of 930 Naira as opposed to 950 Naira, they would prefer to go and queue where they are selling it at the rate of 930 Naira because it makes a 20 Naira difference. So NNPCL understands that allowing these people to come and pick fuel one after the other will cause their own cost to be lower than the one of NNPC.
The marketers do not have the same number of staff as NNPCL; they have very little staff, and they will sell at 930 Naira. As a result of this, the NNPCL will not allow them to come and distort the market. That’s the number two reason why IPMAN cannot directly go to Dangote. They have to pass through the NNPCL.
DANGOTE FUEL NOT EXPENSIVE THAN IMPORTED FUEL
Another question: is the price of Dangote fuel more expensive than imported fuel? No! Dangote fuel is not more expensive than imported fuel.
The landing cost of imported fuel is 1,200 Naira per litre. But it is the NNPCL that has been subsidising it to bring it down to 850 Naira per litre. They call it cost recovery; we know it as subsidy. The government through the NNPCL has been subsidising. If they remove the subsidy from the imported fuel, it will be N1,200 as opposed to Dangote’s N950
But why the hullabaloo? TheThe The reason is that Nigerians have the expectation that when Dangote refinery finally comes, fuel will be sold between 150 and 200 naira. That is the expectation, but that is a far cry from the reality on the ground now. The reality on the ground now is that with this template, there is no way Dangote can be selling fuel at 300 Naira or 250 Naira per litre. Dangote will find this difficult to explain to Nigerians because they will feel disappointed and let down, but that is the truth of the matter.
DANGOTE CAN’T BRING DOWN THE COST OF FUEL
So how can we get Dangote to be selling fuel at 200 Naira or 250 Naira per liter? The price template will tell you that there are two factors in this template that determine the cost of fuel.
The first one is the price of crude oil in the international market. So if the price of crude oil is $70 per barrel, it’s a reason.
The second reason is our exchange rate. If our exchange rate should come down to 500 naira, instantly the price of petrol will also come down. Today, our exchange rate is 1,635 and that explains one of the reasons why fuel is expensive in Nigeria. If the price of crude oil in the international market should come down to $40 per barrel, the price of crude oil will also come down.
These are the two factors that determine the price of oil, and these factors are not in the hands of Dangote. They are in the hands of the fiscal and monetary policies of the Federal Government, and Dangote has no power to pick and regulate our forex, and as long as these two factors continue to interplay, bringing down the price of fuel will be difficult.
Now how do we do it? Some people say what about the naira to naira. What is naira to naira? This is when the Federal Government sells crude oil to Dangote in naira, and Dangote in turn will sell petrol to Nigerians in naira. Will this have an impact? No, no, no, it will not have any impact. In fact, if it will have an impact, it shows that the federal federal government is starting to subsidise. You want to disagree? Yeah, you can disagree, disagree, but let me explain. The major component of fuel is crude oil, and to get crude oil,oil,oil, you have to bring it out of the ground, and what brings crude oil out of the ground is dollars. You pay in dollars to bring it out of the ground, and once it comes out of the ground, if you sell it in naira there is no problem, but by the time you are returning to bring the crude oil out again, you must convert that your naira to dollar to be able to bring it out of the ground. So you can see that it is still the same cycle;you will continue to be challenged
WHAT’S THE WAY FORWARD?
But what is the way out? Nigeria has an OPEC quota of 2 million barrels per day. It brings out about between 1.3 million and 1.6 million per barrel.
Originally, when the government refineries were working, Nigerians had allocated 445, 000 barrels of crude oil to all the refineries, and when Dangote was coming to start his refinery, his cash flow was towards that 445,000 This 445,000 was meant for refining crude oil for consumption by Nigerians. The cost is for the consumption of Nigerians. It is not under the price of the international market, and since it is only the cost of production that we would bear and not the price of production. What does this mean? The cost and the price are two different things. The cost is what it costs you; the price is the cost plus margin (profit). When you are selling crude oil to Nigerians, you take away your margin. For example, if the international price of crude oil is $70 per barrel because you are selling to Nigerians, it should be $40.
These are the things Nigerians are agitating about saying that the crude oil is in their country and that the cost is in the country. These are legitimate arguments, but the process is where the problem is, and if Dangote gets the crude oil at the rate of $40, and our exchange rate comes down to 300 naira, the price of fuel with the refinery and margin and everything would probably be around 180 naira per litre. Now the problem is that if Nigeria begins to sell fuel at the rate of 180 Naira to 220 Naira per litre, and Cotonou is buying fuel at 1,200 and Togo 1,500 naira, the same Nigerian businessmen. will carry trucks and go and sell fuel at Cotonou and Togo, then we return back to fuel scarcity. scarcity. This will happen because of the huge margin.
Where do we go from here? Nigerians must understand that the era of fossil fuels is going down gradually, and we must begin to think about renewable energy, and we must also be thinking about compressed natural gas (CNG)
We must begin to think about alternative sources of energy both for living and mobility. The earlier we begin to fix our minds towards these things and concentrate less on fuel and petrol, the better for us as a country.
In developed countries, the price of fuel is arguably around this price, but if you look at their filling stations at any point in time, you will hardly see three to five cars. This is because they have mass transit and they have electric vehicles. The majority of them use smaller cars that consume less petrol. So you don’t see people queuing up at their petrol stations, and whenever there is an adjustment in price, nobody complains. Some people only use their cars on weekends; some people take their cars to the train station and board trains.
The only way forward is through alternative sources. We have laboured so much on petrol as a singular means of energy. Looking at all these arithmetics, we will understand well that it will be difficult for this government to bring down the rate of forex from 1,635 to 300 naira as well as to sell fuel to Dangote at the rate of $40 when the price in the international market is $70.
As we can see, there is nothing Dangote can do in terms of pricing because as he collects, he sells. His initial thought that when he started the refinery, the price of crude oil would crash was a big mistake. He is now finding it difficult to tell Nigerians
Some people are saying that when Dangote starts selling diesel that the price crashes, that is not true. When Dangote came to the market selling diesel, dollars were about N1,900 and diesel was very high, and when Naira came down to N1,200, diesel came down to N1,200. It was not Dangote that made this happen. It was due to the exchange rate that fell, and up to now, diesel is N1200 and not even N900. So Dangote has not done anything in this regard.
The sad reality for us is that Dangote refineries cannot crash prices unless the Federal Government gives Dangote crude oil at a very reduced discount price. The forex comes down. Anything short of this is all fallacy, waste of time, and vexation of the spirit, and this is the reality that is ground. Dangote can only sell crude oil as he receives it from the NNPCL.
I hope this has made a lot of impact. Please share.Till I come again next time. I am Lai Omotola
